Agreement in Denver comes just months after similar deal with Barnabas Health in New Jersey

NEWS OF A HOSPITAL INPATIENT LAB MANAGEMENT AGREEMENT between HealthONE of Denver and Quest Diagnostics Incorporated marks the second time in six months that the public lab company has earned an inpatient lab management pact with a multi-hospital health system.

There are two aspects of this development that make it newsworthy for lab administrators and pathologists throughout the United States. First, two such agreements in six months is evidence that Quest Diagnostics may now have an attractive value proposition that encourages hospital CEOs to consider allowing an outside lab company to manage their hospital inpatient testing activities.

Second, doing hospital inpatient lab management contracts is believed to be one strategy that Quest hopes to use as a way to replace specimen volume that it has lost in recent years. In fact, replacing lost specimen volume in the Denver market is one key to understanding this new pact between HealthONE and Quest. That’s the belief of Noel Maring, Vice President of Hospital Affiliations at Sonic Healthcare USA.

Maring handles negotiations with hospitals and health systems for Sonic Healthcare. He is aware of the RFPs and expressions of interest concerning inpatient and outpatient laboratory options that hospital CEOs have issued to major lab companies. There are signs Quest is focusing on similar hospital lab management deals, indicating that the nation’s second largest lab company is pursuing inpatient testing aggressively.

Agreement with Barnabas

The first of these two deals came in December, when Quest announced an agreement to manage inpatient clinical lab testing in seven hospitals owned by Barnabas Health, the largest nonprofit health system in New Jersey.

Under the agreement with Barnabas, Quest did not acquire the outreach lab business in those seven hospitals. Among those seven facilities are two of the largest hospitals in the state: Newark Beth Israel and Saint Barnabas. The other five hospitals are Monmouth Medical Center, Long Branch; Monmouth Medical Center Southern Campus, Lakewood; Jersey City Medical Center, Jersey City; Community Medical Center, Toms River; and Clara Maass Medical Center, Belleville.

From Inpatient to Outreach

In Denver, Quest could use its agreement to manage the inpatient lab test volume for the HealthONE System as a stepping stone to do the outreach work as well. In either case, Maring noted that Quest will welcome the additional lab test volume from the HealthONE agreement.

“Denver has been a tough market for Quest,” Maring noted. “Several events caused Quest Diagnostics to lose a considerable amount of market share from that marketplace in recent years. Both Laboratory Corporation of America and Colorado Laboratory Services (CLS),PAML’s partnership with Centura Health, picked up key managed care con- tracts in Denver and those gains were Quest’s loss.”

Lost managed care contracts are an important element in the Denver story. “Everyone knows that in 2007, LabCorp signed an exclusive national contract with UnitedHealthcare, and that deal was costly to Quest in Denver and other markets,” observed Maring. “But LabCorp also picked up a second managed care contract from Quest in the Denver market from Anthem Blue Cross Blue Shield of Colorado. The Anthem contract was not an exclusive deal because CLS also took some of that work, but, again, it was a loss of specimens and revenue for Quest.

Two Managed Care Contracts

“Those two key managed care contracts represented a lot of volume, which was a big issue for Quest because it has a sizeable regional lab facility in that market,” he added. “One of the benefits of this deal with HealthONE is that it allows Quest to sustain enough specimen volume to maintain a local presence in the Denver marketplace.

“It’s significant that Quest Diagnostics has a major lab facility in Denver because—to support inpatient lab operations—Quest can move less time-sensitive inpatient tests out of the hospitals into what should be a more efficient core laboratory operation,” he commented. “When a local lab facility is located within 45 minutes to an hour in travel time, that lab can be used to pull testing out of the hospital laboratories.

“But that is not the full story behind this inpatient lab management agreement,” continued Maring. “Even if Quest didn’t have a lab there in Denver, there is still an opportunity for it to improve efficiency in HealthONE’s hospital labs.

Consolidation of Testing

“I’m sure the HealthONE labs are run relatively efficiently because HealthONE is part of HCA, which runs tight operations in all of its facilities,” he stated. “On the other hand, if HealthONE has not fully consolidated lab testing into one of its larger hospital labs, then a fair amount of duplication of tests among those six hospitals would still exist. By centralizing some testing in a core laboratory Quest would have an opportunity to reduce lab testing costs.

“But increased efficiency is only part of the opportunity that this agreement represents for Quest Diagnostics,” added Maring. “As mentioned earlier, once an outside lab gets a management contract for inpatient testing, it’s in a strong posi- tion with that health system to get other associated business as well.

“That was PAML’s experience in its many laboratory partnerships with hospitals,“ he stated. “There is no guarantee that the outside lab company will get additional lab testing volume, but such an agreement is an opportunity to become involved in the lab outreach business in addition to doing the inpatient testing.

“If the outreach work is coming from employed or affiliated physicians, for example, then the case can be made that the lab can produce all test results from inpatient and outreach, thus creating a full patient record,” he commented. “That means all patients would have the same test methodologies, reference ranges, and the same content for patient profiles.

Reducing InPatient Costs

That level of consistency is becoming more and more important today,” he said. This is particularly true if the health system wants to leverage lab data to reduce other inpatient or total health costs.”

Having noted the advantages to an outside lab company that holds an agreement to manage a hospital’s inpatient testing, Maring pointed out an odd aspect to the two inpatient testing agreements that Quest Diagnostics has announced during the past six months.

“The lack of access to the hospitals’ lab outreach business is a surprising element of the deal that Quest announced with Barnabas last December,” noted Maring. “At the time, Quest said only that it would manage the inpatient testing. By itself, that’s a sizeable contract. However, no outreach lab business was associated with it.

Lower Lab Test Margins

“Inpatient lab margins are lower due to the need for 24/7 operations and on-demand testing that limit batching and economies of scale,” Maring added. “That said, inpa- tient testing contracts can still be profitable for commercial lab companies, just not as profitable as the lab outreach business.”

Asked to explain why outreach testing probably was not part of the two Quest inpatient lab management agreements, Maring speculated as to what might be true in each market.

“In New Jersey, it could be that Quest Diagnostics already had much of the Barnabas Health outreach work,” Maring added. “After all, Quest has its huge lab facility in Teterboro, N.J., that may have allowed it to capture that outreach testing from physician offices around the Barnabas hospitals over the years.

“But Denver is different because LabCorp and Colorado Laboratory Services have significant portions of the outreach business from the HealthONE hospitals,” he observed. “We can assume that Quest was unable to tie the outreach business to the contract because HealthONE did not have an active lab outreach program and could not commit outreach lab work (even from their employed physicians) that is performed by other laboratories.

Other Management Contracts

This is probably not news to Quest Diagnostics because the word on the street is that they have more than 60 management arrangements with hospitals around the country,” he added. “It is also known that Quest has about 20 people working full-time to develop agreements to manage hospital inpatient testing.

“I’ve seen estimates that hospital labs do about 50% to 55% of the nation’s total inpatient and outreach lab volume,” Maring concluded. “If that’s true, then it’s a significant untapped market for commercial laboratories, and it appears that Quest Diagnostics is devoting resources to gain market share in this sector.”

If hospital CEOs are ready to attack costs in their labs, then proactive lab administrators and pathologists will want to proactively cut expenses so as to make it unnecessary for hospital administration to want to outsource the management of the inpatient labs.